Study guide
6.1 Accrued & Prepaid Expenses and Income
AAT Level 3 Diploma in Accounting Q2022
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1 Chapter 1: Accounting Principles & Ethical Framework
1.1 Fundamental Accounting Concepts & Assumptions 1.2 Regulatory Framework & IAS/IFRS Terminology 1.3 Professional Ethics & the AAT Code of Conduct
2 Chapter 2: Advanced Double-Entry Bookkeeping & Control Accounts
2.1 Capital vs. Revenue Expenditure & Prime Entry Books 2.2 Control Accounts & Reconciliation Procedures 2.3 Period-End Routines, Verification & Accounting Software
3 Chapter 3: Accounting Errors & The Suspense Account
3.1 Types of Accounting Errors & Trial Balance Impact 3.2 Correcting Errors & Clearing the Suspense Account
4 Chapter 4: Non-Current Assets: Acquisition, Register & Disposal
4.1 Capitalising Non-Current Assets & The Asset Register 4.2 Disposal of Non-Current Assets & Part-Exchange
5 Chapter 5: Depreciation Methods & Accounting Entries
5.1 Straight-Line & Reducing Balance Depreciation 5.2 Depreciation Accounting Policies & Journal Entries
6 Chapter 6: Period-End Adjustments: Accruals, Prepayments & Inventory
6.1 Accrued & Prepaid Expenses and Income 6.2 Closing Inventory Valuation & IAS 2 Rules
7 Chapter 7: Period-End Adjustments: Irrecoverable Debts & Allowances
7.1 Writing Off Irrecoverable Debts & Debt Recovery 7.2 Allowance for Doubtful Receivables 7.3 Professional Scepticism, Ethics & Period-End Pressures
8 Chapter 8: The Extended Trial Balance (ETB)
8.1 Trial Balance Structure & Initial Preparation 8.2 Recording Adjustments & Completing the Extended Trial Balance
9 Chapter 9: Financial Statements: Sole Traders
9.1 Sole Trader Statement of Profit or Loss 9.2 Sole Trader Statement of Financial Position
10 Chapter 10: Financial Statements: Partnerships
10.1 Partnership Principles & The Partnership Act 1890 10.2 Partnership Appropriation Account & Capital/Current Accounts
11 Chapter 11: Financial Statement Analysis & Ratios
11.1 Profitability & Return on Capital Employed 11.2 Liquidity, Working Capital & Efficiency Ratios
12 Chapter 12: Incomplete Records & Reconstructing Accounts
12.1 The Capital Comparison Method & Cash/Bank Summaries 12.2 Mark-up, Margin & Account Reconstruction 12.3 Testing the Reasonableness of Reconstructed Figures
6.1 Accrued & Prepaid Expenses and Income
Key Takeaways Explain This Topic AI
The accruals (matching) concept under IAS 1 and FRS 102 mandates that expenses and income are recognized in the accounting period in which they are incurred or earned, irrespective of the timing of cash settlement.
Accrued expenses (accruals) represent liabilities for goods or services consumed during the period but not yet invoiced or paid: Debit Expense (SPL), Credit Accruals / Other Payables (SFP Current Liability).
Prepaid expenses (prepayments) represent payments made during the period for future economic benefits: Debit Prepayments / Other Receivables (SFP Current Asset), Credit Expense (SPL).
Accrued income represents revenue earned during the period but not yet invoiced or received (SFP Current Asset), whereas Deferred income represents cash received in advance for future performance obligations (SFP Current Liability).
At the start of the subsequent accounting period, year-end accruals and prepayments should be reversed (opening reversal journals) to ensure that incoming invoices and payments are correctly absorbed without manual multi-period splitting.
Last updated: August 2026
Accrued & Prepaid Expenses and Income
In financial accounting, the timing of cash receipts and payments rarely coincides exactly with the period in which economic benefits are consumed or generated. If a business recorded transactions strictly when cash changed hands—known as the cash basis of accounting —its financial statements would fluctuate erratically and fail to present a true and fair view of operating performance.
To ensure financial statements reflect economic reality, AAT Level 3 Financial Accounting: Preparing Financial Statements (FAPS) requires the rigorous application of the accruals concept (also termed the matching principle ) governed by IAS 1 ( Presentation of Financial Statements ) and FRS 102 . Under this principle, income and expenses are recognized in the period to which they relate, regardless of when cash is paid or received.
1. The Four Categories of Period-End Adjustments
Period-end adjustments for time-apportioned items fall into four distinct categories based on whether they relate to expenses or income , and whether cash settlement occurs in arrears (afterwards) or in advance (beforehand). ┌─────────────────────────────────────────────────────────────────────────────┐
- │ THE FOUR PERIOD-END ADJUSTMENT CATEGORIES │
- ├──────────────────────────────────────┬──────────────────────────────────────┤
- │ EXPENSES (Costs Consumed) │ INCOME (Revenue Generated) │
- ├──────────────────────────────────────┼──────────────────────────────────────┤
- │ 1. ACCRUED EXPENSE (Accrual) │ 3. ACCRUED INCOME │
- │ • Expense incurred; NOT yet paid │ • Income earned; NOT yet received │
- │ • Service consumed in current period │ • Service provided in current period │
- │ • Dr Expense (SPL) │ • Dr Accrued Income (SFP Asset) │
- │ • Cr Accruals (SFP Liability) │ • Cr Income Account (SPL) │
- ├──────────────────────────────────────┼──────────────────────────────────────┤
- │ 2. PREPAID EXPENSE (Prepayment) │ 4. DEFERRED / PREPAID INCOME │
- │ • Expense paid; NOT yet incurred │ • Income received; NOT yet earned │
- │ • Paid in advance for next period │ • Received in advance for future │
- │ • Dr Prepayments (SFP Asset) │ • Dr Income Account (SPL) │
- │ • Cr Expense (SPL) │ • Cr Deferred Income (SFP Liab) │
- └──────────────────────────────────────┴──────────────────────────────────────┘
- Category 1: Accrued Expenses (Accruals)
An accrued expense occurs when a business has consumed goods or services during the current accounting period, but by the reporting date, no invoice has been received and no cash payment has been made.
Common Examples : Unbilled electricity and gas consumed in the final months of the year, telephone and broadband usage, unbilled legal/accountancy audit fees, employee overtime worked in the final week of December paid in January.
Accounting Objective : Increase the expense in the Statement of Profit or Loss (SPL) to reflect the full economic resource consumed, and establish a corresponding liability in the Statement of Financial Position (SFP).
- Year-End Adjusting Journal Entry : Date Account Titles & Explanation Debit (£) Credit (£)
- 20X5
- Dec 31 Electricity Expense (SPL) 1,400
- Accruals / Other Payables (SFP) 1,400
- (To record accrued electricity consumed in
- Nov-Dec 20X5 per estimated meter readings)
Financial Statement Impact :
SPL : Increases Operating Expenses → Decreases Profit for the Year.
SFP : Increases Current Liabilities (under Other Payables ).
Category 2: Prepaid Expenses (Prepayments)
A prepaid expense occurs when a business pays for goods or services in advance during the current accounting period, but the economic benefit extends into one or more future accounting periods.
Common Examples : Commercial property rent paid quarterly in advance, annual business insurance premiums, local council business rates paid annually in advance, vehicle road tax, software subscriptions.
Accounting Objective : Remove the portion of the cash payment that relates to future periods from the current period's SPL expense, and recognize it as a current asset in the SFP.
- Year-End Adjusting Journal Entry : Date Account Titles & Explanation Debit (£) Credit (£)
- 20X5
- Dec 31 Prepayments / Other Receivables (SFP) 2,100
- Insurance Expense (SPL) 2,100
- (To transfer 6 months prepaid insurance running
- from 1 Jan to 30 June 20X6 to Current Assets)
Financial Statement Impact :
SPL : Reduces Operating Expenses → Increases Profit for the Year.
SFP : Increases Current Assets (under Other Receivables ).
Category 3: Accrued Income
Accrued income arises when a business has earned revenue or income during the accounting period by providing goods, services, or lending capital, but the payment has not yet been received or invoiced by the reporting date.
Common Examples : Bank deposit interest earned for the final quarter not yet credited by the bank, sales commission earned on completed customer contracts, sublet rental income billed in arrears, consultancy services delivered prior to year-end.
Accounting Objective : Increase total income in the SPL to reflect all revenue earned, and recognize a receivable asset in the SFP.
- Year-End Adjusting Journal Entry : Date Account Titles & Explanation Debit (£) Credit (£)
- 20X5
- Dec 31 Accrued Income / Other Receivables (SFP) 850
- Commission Income (SPL) 850
- (To recognize commission earned on sales completed
- in Dec 20X5 receivable in Jan 20X6)
Financial Statement Impact :
SPL : Increases Other Income → Increases Profit for the Year.
SFP : Increases Current Assets (under Other Receivables ).
Category 4: Deferred Income (Prepaid / Unearned Income)
Deferred income (also referred to as prepaid income or income received in advance ) occurs when a business receives cash from a customer or tenant during the current accounting period for services or obligations that will only be fulfilled in a future accounting period.
Common Examples : Sublet warehouse rent received quarterly in advance, annual maintenance service contracts billed and collected upfront, customer retainers for future work, advance course fees.
Accounting Objective : Remove the unearned income from the current period's SPL and record a current liability in the SFP representing the ongoing performance obligation owed to the customer.
- Year-End Adjusting Journal Entry : Date Account Titles & Explanation Debit (£) Credit (£)
- 20X5
- Dec 31 Rental Income (SPL) 1,800
- Deferred Income / Other Payables (SFP) 1,800
- (To defer 2 months warehouse sublet rent received
- in advance relating to Jan-Feb 20X6)
Financial Statement Impact :
SPL : Reduces Other Income → Decreases Profit for the Year.
SFP : Increases Current Liabilities (under Other Payables ).
2. Master Comparison & Financial Statement Matrix
The following master reference table summarizes the four adjustment categories, their accounting entries, financial statement classification, and subsequent opening reversal treatment:
Adjustment Category Economic Reality Year-End Adjusting Entry Impact on SPL Profit SFP Classification Opening Reversal Entry (Start of Next Year)
Accrued Expense Benefit consumed; cash unpaid Dr Expense (SPL); Cr Accruals (SFP) Decreases Profit Current Liability (Other Payables) Dr Accruals (SFP); Cr Expense (SPL)
Prepaid Expense Cash paid; benefit in future Dr Prepayments (SFP); Cr Expense (SPL) Increases Profit Current Asset (Other Receivables) Dr Expense (SPL); Cr Prepayments (SFP)
Accrued Income Service provided; cash unreceived Dr Accrued Income (SFP); Cr Income (SPL) Increases Profit Current Asset (Other Receivables) Dr Income (SPL); Cr Accrued Income (SFP)
Deferred Income Cash received; service in future Dr Income (SPL); Cr Deferred Income (SFP) Decreases Profit Current Liability (Other Payables) Dr Deferred Income (SFP); Cr Income (SPL)
3. Time Apportionment Rules & Calculation Protocols
In AAT Level 3 assessments, calculating accruals and prepayments requires precise time apportionment. You must identify the exact coverage period of each transaction and compare it against the entity's financial year-end .
Step-by-Step Calculation Routine
Identify the Billing Period : Determine the exact start date and end date of the invoice or payment period.
Identify the Financial Year-End Date : Establish the boundary date separating the current accounting period from the next.
Determine the Overlap : Count the exact number of months (or days) falling into the current year versus the next year .
Calculate Monthly Rate : Divide the total invoice cost by the total months covered (e.g. 3 months for quarterly bills, 12 months for annual bills).
Compute Adjustment Amount :
Prepayment = Monthly Rate x Number of Months belonging to Next Year
Accrual = Monthly Rate x Number of Months consumed in Current Year without invoice FINANCIAL YEAR-END: 31 DECEMBER 20X5
- ─────────────────────────────────────
- ◄─── CURRENT ACCOUNTING YEAR (20X5) ───► ◄─── NEXT ACCOUNTING YEAR (20X6) ───►
PREPAYMENT EXAMPLE (Rent paid 1 Nov 20X5 to 31 Jan 20X6 = £3,600):
- [ Nov 20X5 ] [ Dec 20X5 ] [ Jan 20X6 ]
- └─────── 2 Months Incurred ───────┘ └─── 1 Month Prepaid (SFP Asset £1,200) ───┘
- (Charged to SPL = £2,400)
ACCRUAL EXAMPLE (Electricity bill for Nov 20X5 to Jan 20X6 = £1,800 received Feb 20X6):
- [ Nov 20X5 ] [ Dec 20X5 ] [ Jan 20X6 ]
- └─────── 2 Months Consumed ───────┘ └─── 1 Month Next Year (Paid in 20X6) ───────┘
- (Accrued to SPL = £1,200)
- (SFP Liability = £1,200)
- Crucial VAT Rule for Period-End Adjustments
In standard UK bookkeeping, Value Added Tax (VAT) is recorded in the VAT Control Account at the date the tax invoice is issued or received.
Golden Rule : Prepayments and accruals are calculated strictly on the net amounts (excluding VAT) . VAT is never apportioned or accrued into expense accounts.
4. Reversal Entries: Mechanics at the Start of the Next Accounting Period
At the close of a financial year, closing balances on balance sheet accounts ( Accruals , Prepayments , Deferred Income , Accrued Income ) are carried forward as Balance c/d and brought down as Balance b/d on Day 1 of the new financial year.
Why Opening Reversals are Necessary
If opening balances were left sitting in the nominal ledger, every subsequent cash payment during the new year would have to be manually analyzed and split between settling the previous year's liability/asset and the current year's expense.
To prevent errors and streamline bookkeeping, professional practice requires opening reversal journal entries on the first day of the new financial year: ┌─────────────────────────────────────────────────────────────────────────────┐
- │ OPENING REVERSAL PROTOCOL (1 JANUARY 20X6) │
- ├─────────────────────────────────────────────────────────────────────────────┤
- │ 1. REVERSE ACCRUED EXPENSE: │
- │ Debit: Accruals / Other Payables (SFP) [Eliminates opening liab] │
- │ Credit: Expense Account (SPL) [Creates opening credit] │
- │ │
- │ 2. REVERSE PREPAID EXPENSE: │
- │ Debit: Expense Account (SPL) [Creates opening debit] │
- │ Credit: Prepayments / Other Receivables (SFP) [Eliminates opening asset] │
- │ │
- │ 3. REVERSE ACCRUED INCOME: │
- │ Debit: Income Account (SPL) [Creates opening debit] │
- │ Credit: Accrued Income (SFP) [Eliminates opening asset] │
- │ │
- │ 4. REVERSE DEFERRED INCOME: │
- │ Debit: Deferred Income (SFP) [Eliminates opening liab] │
- │ Credit: Income Account (SPL) [Creates opening credit] │
- └─────────────────────────────────────────────────────────────────────────────┘
- How the Reversal Mechanism Works in Practice
When the full invoice is subsequently paid during the new year (e.g. £1,800 paid in February for November to January electricity):
The Cash Book payment of £1,800 is debited entirely to Electricity Expense .
The opening reversal entry on 1 January had placed a credit of £1,200 in Electricity Expense .
The net debit balance remaining on Electricity Expense automatically equals £600 (£1,800 Dr − £1,200 Cr), which is the exact, correct expense for January 20X6!
5. Comprehensive Multi-Period Master Case Study: Orion Trading Enterprises
To master period-end adjustments across consecutive financial years, work through the complete records of Orion Trading Enterprises for the years ended 31 December 20X5 and 31 December 20X6 .
Ledger Accounts to Track:
- Rent Payable Expense
- Electricity & Gas Expense
- Local Authority Business Rates Expense
- Sublet Rental Income
- Profile 1: Rent Payable Expense (Quarterly in Advance)
Terms : Premises rent is £1,200 per month (£3,600 per quarter), payable quarterly in advance on 1 February, 1 May, 1 August, and 1 November.
20X5 History :
Opening prepayment at 1 Jan 20X5: £1,200 (for January 20X5, paid on 1 Nov 20X4).
Payments made via bank in 20X5: 1 Feb (£3,600), 1 May (£3,600), 1 Aug (£3,600), 1 Nov (£3,600). Total paid = £14,400 .
Prepayment at 31 Dec 20X5: The payment on 1 Nov 20X5 covers Nov 20X5, Dec 20X5, and Jan 20X6. 1 month relates to 20X6: £3,600 / 3 = £1,200 .
SPL Charge for 20X5 : Opening Prepayment (£1,200) + Payments (£14,400) - Closing Prepayment (£1,200) = £14,400 (12 months x £1,200).
20X6 History :
Rent increases to £1,500 per month (£4,500 per quarter) effective from 1 May 20X6.
Payments made in 20X6: 1 Feb (£3,600), 1 May (£4,500), 1 Aug (£4,500), 1 Nov (£4,500). Total paid = £17,100 .
Prepayment at 31 Dec 20X6: 1 month of 1 Nov payment relates to Jan 20X7: £4,500 / 3 = £1,500 .
SPL Charge for 20X6 : Opening Prepayment (£1,200) + Payments (£17,100) - Closing Prepayment (£1,500) = £16,800 (4 mos @ £1,200 + 8 mos @ £1,500). RENT PAYABLE EXPENSE
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Date Details £ Date Details £
- 20X5 20X5
- Jan 1 Prepayments (Reversal)1,200Dec 31 Prepayments (c/d) 1,200
- Feb 1 Bank 3,600 Dec 31 SPL (Transfer) 14,400
- May 1 Bank 3,600
- Aug 1 Bank 3,600
- Nov 1 Bank 3,600
- ────────────────────────────────────────────────────────────────────────────────
- 15,600 15,600
- ────────────────────────────────────────────────────────────────────────────────
- 20X6 20X6
- Jan 1 Prepayments (Reversal)1,200Dec 31 Prepayments (c/d) 1,500
- Feb 1 Bank 3,600 Dec 31 SPL (Transfer) 16,800
- May 1 Bank 4,500
- Aug 1 Bank 4,500
- Nov 1 Bank 4,500
- ────────────────────────────────────────────────────────────────────────────────
- 18,300 18,300
- ────────────────────────────────────────────────────────────────────────────────
- 20X7
- Jan 1 Prepayments (Reversal)1,500
- Profile 2: Electricity & Gas Expense (Quarterly in Arrears)
Terms : Utilities are billed quarterly in arrears following meter readings.
20X5 History :
Opening accrual at 1 Jan 20X5: £1,200 (for Nov-Dec 20X4 usage).
Payments made in 20X5: 28 Feb (£1,800 for Nov-Jan), 31 May (£1,650), 31 Aug (£1,400), 30 Nov (£1,500). Total paid = £6,350 .
Accrual at 31 Dec 20X5: The bill for Nov 20X5 to Jan 20X6 is estimated at £1,950 (£650/month). Usage for Nov-Dec 20X5 (2 months) = 2 x £650 = £1,300 .
SPL Charge for 20X5 : Payments (£6,350) - Opening Accrual (£1,200) + Closing Accrual (£1,300) = £6,450 .
20X6 History :
Payments made in 20X6: 28 Feb (£2,100 actual bill for Nov-Jan), 31 May (£1,750), 31 Aug (£1,500), 30 Nov (£1,650). Total paid = £7,000 .
Accrual at 31 Dec 20X6: Estimated bill for Nov 20X6 to Jan 20X7 is £2,250 (£750/month). Usage for Nov-Dec 20X6 (2 months) = 2 x £750 = £1,500 .
SPL Charge for 20X6 : Payments (£7,000) - Opening Accrual (£1,300) + Closing Accrual (£1,500) = £7,200 . ELECTRICITY & GAS EXPENSE
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Date Details £ Date Details £
- 20X5 20X5
- Feb 28 Bank 1,800 Jan 1 Accruals (Reversal) 1,200
- May 31 Bank 1,650 Dec 31 SPL (Transfer) 6,450
- Aug 31 Bank 1,400
- Nov 30 Bank 1,500
- Dec 31 Accruals (c/d) 1,300
- ────────────────────────────────────────────────────────────────────────────────
- 7,650 7,650
- ────────────────────────────────────────────────────────────────────────────────
- 20X6 20X6
- Feb 28 Bank 2,100 Jan 1 Accruals (Reversal) 1,300
- May 31 Bank 1,750 Dec 31 SPL (Transfer) 7,200
- Aug 31 Bank 1,500
- Nov 30 Bank 1,650
- Dec 31 Accruals (c/d) 1,500
- ────────────────────────────────────────────────────────────────────────────────
- 8,500 8,500
- ────────────────────────────────────────────────────────────────────────────────
- 20X7
- Jan 1 Accruals (Reversal) 1,500
- Profile 3: Local Authority Business Rates (Annual in Advance)
Terms : Business rates are billed annually for the UK local authority fiscal year running 1 April to 31 March , payable in full on 1 April.
20X5 History :
Opening prepayment at 1 Jan 20X5: £1,400 (3 months of 20X4/X5 rates: 3/12 x £5,600 ).
Payment on 1 Apr 20X5: £6,000 for 1 Apr 20X5 to 31 Mar 20X6.
Closing prepayment at 31 Dec 20X5: 3 months (Jan-Mar 20X6) relate to next year: 3/12 x £6,000 = £1,500 .
SPL Charge for 20X5 : Opening Prepayment (£1,400) + Payment (£6,000) - Closing Prepayment (£1,500) = £5,900 .
20X6 History :
Payment on 1 Apr 20X6: £6,600 for 1 Apr 20X6 to 31 Mar 20X7.
Closing prepayment at 31 Dec 20X6: 3 months (Jan-Mar 20X7) relate to next year: 3/12 x £6,600 = £1,650 .
SPL Charge for 20X6 : Opening Prepayment (£1,500) + Payment (£6,600) - Closing Prepayment (£1,650) = £6,450 . BUSINESS RATES EXPENSE
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Date Details £ Date Details £
- 20X5 20X5
- Jan 1 Prepayments (Reversal)1,400Dec 31 Prepayments (c/d) 1,500
- Apr 1 Bank 6,000 Dec 31 SPL (Transfer) 5,900
- ────────────────────────────────────────────────────────────────────────────────
- 7,400 7,400
- ────────────────────────────────────────────────────────────────────────────────
- 20X6 20X6
- Jan 1 Prepayments (Reversal)1,500Dec 31 Prepayments (c/d) 1,650
- Apr 1 Bank 6,600 Dec 31 SPL (Transfer) 6,450
- ────────────────────────────────────────────────────────────────────────────────
- 8,100 8,100
- ────────────────────────────────────────────────────────────────────────────────
- 20X7
- Jan 1 Prepayments (Reversal)1,650
- Profile 4: Sublet Rental Income (Deferred & Accrued Income)
Terms : Orion sublets warehouse space for £600 per month (£1,800 per quarter), receivable quarterly in advance on 1 January, 1 April, 1 July, and 1 October.
20X5 History :
Receipts in 20X5: 1 Jan (£1,800), 1 Apr (£1,800), 1 Jul (£1,800), 1 Oct (£1,800). Total regular receipts = £7,200.
On 15 Dec 20X5, the tenant paid £1,800 early, covering the quarter 1 Jan 20X6 to 31 Mar 20X6. Total cash received in 20X5 = £9,000 .
Deferred Income at 31 Dec 20X5: Entire £1,800 relates to 20X6.
SPL Credit for 20X5 : Receipts (£9,000) - Deferred Income (£1,800) = £7,200 (12 months x £600).
20X6 History :
Receipts in 20X6: 1 Apr (£1,800), 1 Jul (£1,800), 1 Oct (£1,800). Total cash received in 20X6 = £5,400 .
At 31 Dec 20X6, the tenant has not yet paid the invoice for the quarter starting 1 Jan 20X7 (Deferred income = £0).
SPL Credit for 20X6 : Opening Deferred Income (£1,800) + Receipts (£5,400) - Closing Deferred (£0) = £7,200 . SUBLET RENTAL INCOME
- Dr Cr
- ────────────────────────────────────────────────────────────────────────────────
- Date Details £ Date Details £
- 20X5 20X5
- Dec 31 Deferred Inc (c/d) 1,800 Jan 1 Bank 1,800
- Dec 31 SPL (Transfer) 7,200 Apr 1 Bank 1,800
- Jul 1 Bank 1,800
- Oct 1 Bank 1,800
- Dec 15 Bank 1,800
- ────────────────────────────────────────────────────────────────────────────────
- 9,000 9,000
- ────────────────────────────────────────────────────────────────────────────────
- 20X6 20X6
- Dec 31 SPL (Transfer) 7,200 Jan 1 Deferred Inc (Rev) 1,800
- Apr 1 Bank 1,800
- Jul 1 Bank 1,800
- Oct 1 Bank 1,800
- ────────────────────────────────────────────────────────────────────────────────
- 7,200 7,200
- 6. Financial Statements Summary Extracts for Orion Trading
- Statement of Profit or Loss (SPL) Extracts
- Line Item 20X5 (£) 20X6 (£)
- Other Income : Sublet Rental Income 7,200 7,200
Operating Expenses :
- Rent Payable (14,400) (16,800)
- Electricity & Gas (6,450) (7,200)
- Business Rates (5,900) (6,450)
- Statement of Financial Position (SFP) Extracts
- Classification & Line Item At 31 Dec 20X5 (£) At 31 Dec 20X6 (£)
- Current Assets : Other Receivables
- Prepayments (Rent: £1,200 / £1,500; Rates: £1,500 / £1,650) 2,700 3,150
- Current Liabilities : Other Payables
- Accruals (Electricity & Gas) 1,300 1,500
- Deferred Income (Sublet Rent) 1,800 0
- 7. Key Exam Pitfalls & Troubleshooting Checklist
Omitting Opening Reversals : Forgetting to post opening reversals on Day 1 of the new accounting period will result in double-counting or omitting expenses when the next invoice arrives.
Confusing 'Paid in Advance' with 'Paid in Arrears' :
Paid in Advance -> Results in a Prepayment (Current Asset).
Paid in Arrears -> Results in an Accrual (Current Liability).
Miscalibrating Calendar Periods : Always count the months explicitly. An annual insurance policy starting 1 October has 3 months in the current year (Oct, Nov, Dec) and 9 months prepaid into the next year.
VAT Misapplication : Never compute prepayments or accruals on gross figures containing VAT. The expense in the SPL and the adjustment must be purely net of VAT.